Labor Market Institution Reform in Japan: Problems and recommendations

This paper presents five perspectives required in reforming Japan's labor market institutions, drawing on U.S. and European experiences and findings resulting from their empirical analysis, and based on recent economic theories, particularly the basic idea of "comparative institutional analysis" wherein "institutions" are defined as critical infrastructure that enables proper functioning of the market mechanism. The first perspective calls for reforming labor market institutions in terms of shifting from "insider-oriented" to "macro-oriented." This refers to a kind of reform that takes in account not only impacts on regular employees as insiders but also impacts on non-regular employees, companies, and the macro-economy. The second perspective calls for shifting from "heteronomous homogeneity" to "autonomous diversity." In this, the questions of how to address disparities between regular and non-regular workers and how to achieve greater flexibility in work-hours are particularly important. The third perspective is to shift from "uniform regulations" to "decentralized orders" in rulemaking. Here, the facilitation and enhancement of labor-management communication as well as the formulation of process- and procedure-oriented employment rules are crucial in order to promote rulemaking and problem-solving based on the principle of decentralized labor-management autonomy. The fourth perspective calls for a shift in the focus of labor institutions from weak and disadvantaged to empowered individuals. To achieve this end, it is important to establish an effective external labor market and promote capacity-building of individual workers to improve their bargaining power. The fifth perspective is to shift from a "segmented" to a "cross-cutting" approach in reforming labor market institutions. This requires a broader viewpoint that goes beyond a "tug of war" or "zero sum game" between labor and management to achieve a transparent reform process.